A Scheme to Determine Tax Rates Fairly and Quantitatively

Abstract

Abstract. This article discusses a scheme to quantitatively determine a personal income tax rate structure based on the principle of democratic voting. Previous attempts to apply the majority voting rule largely call for voting on predetermined tax positions. In the approach presented here, each taxpayer proposes an egocentric rate system encompassing his or her own obligation as well as all other taxpayers' under generally accepted constraints. The egocentric rate systems proposed by all taxpayers are weight‐averaged to determine the actual tax obligation for all taxpayers. The weights used for the average are in general proportional to the tax contribution. The rate structure can be quantitatively determined from solving simultaneous equations if the weights are predetermined. Although there are an infinite number of choices for the weights, it is argued that the “fair” manner of averaging ranges from equal representation by all taxpayers to equal representation by all tax contributions. An appropriate rate structure should be a linear combination of the tax rates derived from the two limiting scenarios. Alternative egocentric voting schemes under equal representation by all taxpayers are also discussed. While these alternative schemes are politically more acceptable, measures need to be taken to counterbalance the confiscating nature desired by the majority of the voters. Such measures may marginalize the democratic voting process and produce rate structures less progressive than those assuming equal representation of tax contributions. Although the method discussed here allows flexibility on the marginal rate progressivity, it sets the high limit that the lowest and highest income classes ought to pay.